All Forum Posts by: Tom Ott

Uh oh, got a problem. "Last month" is illegal in NJ!  Apparently you can't take deposits of any kind exceeding 1.5 month in total. I knew that was the security limit, but didn't know it was universal, even including pet deposits.  Do I  punt and assume it will never get to the point where they will have a reason to find out? 

Googling about "last month", most of the arguments against are saying you're better off taking more security, but neither is an option here. 

@Jerry Weber, thanks so much for your message.

I believe there is hope for new investors. BUT the pathway to buying your first deal can be challenging. This business is not easy - although I know some experts who make it seem so. The best exercise I can share with you, (and I think I shared in this thread already) but is to get really clear on your WHY.

WHY do you want to acquire apartment buildings. Put a lot of emotion around your specific outcome. Your WHY will keep you motivated and engaged as you will hit roadblocks and challenges.

Also thanks @Tom Ott for your message re-posting my first message in this thread. My WHY was when I was working so many hours as a CPA I was not engaged with my family and missing family time with my two girls. For me during tax season I was working 12-14+ hour days 6 to 7 days a week. My WHY kept me motivated to get up an hour early to look and analyze deals. 

Finally, and I have gotten this personal message from some people so wanted to address in this thread, you don't need to be a CPA, accountant or have a financial background to buy apartment buildings. All of us have a story that makes us unique, use what you have, your passion and people you have in your network to move your business forward.

I actually feel so much relief deciding to move on.  Hopefully I find a good applicant this weekend.  

Baltimore city is a tough market.  I'm going to stick to my criteria and evaluate more closely.  I understand it might not be cut and dry, but at least if I stick to the "deal breakers" I should be "safer".  Nothing is every 100%. 

The house is on Auchentoroly Terr/Liberty Heights.  Baltimore is block to block, so it happens to be on a very good block, diverse residents, and the zoo directly across the street. 

I have an applicant for one of my properties who has no income, but a large amount of money in their name from an inheritance.

Everything else being equal, would you consider renting to someone in this situation? If so, what additional documentation would you ask for, and what additional precautions would you take?

(I just posted this as my first blog, but it's my first success story also)

Strategy

Rent by the Room (RBTR) allows me to maximize the rental income from a home, while still having long-term tenants on leases. Instead of renting out the whole house, I rent out each room individually. Vacancies are minimized because I just have to find one person to rent one room at a time, rather than a family or group to rent the whole house. Also, the price per room can be varied which allows me to dial into the market rate each time a new rooms comes available to rent.

RBTR – House #1

I purchased my first home in Denver in 2010 with the intention of renting out the rooms to offset my expenses. At that time, I needed to find something that wouldn't require much work because I had very little cash. I found the home on the open market and it had been newly remodeled so no rehab was required. It was a 3/2 with an unfinished basement and I purchased it using a first time home buyer program through CHFA, which required only $1000 down. My first renter was my cousin and within a couple weeks I had filled the last open room. The rental income covered my mortgage and part of the utilities which was great!

My next step was to save up enough cash to build-out the basement into an apartment and add another renter. After a couple of years I was ready and received 3 quotes from contractors, which I determined to be too high and decided to do the work myself. After a year of construction the project was complete and I found another renter to occupy the basement. At this point, the rental income was covering all of my expenses and providing some positive CF each month. At this point I was living for free!

RBTR – House #2

At this point I had owned the house for roughly 5 years. I moved companies and was now commuting from south Denver to Boulder every day, which was taking a toll. I wanted to purchase another home and move closer to work so I figured I could repeat the model of the first home. The RE market in Denver had grown significantly and I couldn't find another 3/2 home that I could apply the same model to. I decided to find a larger home so that I could rent out more rooms from the start, so I found a 4/2 which would allow me to cover the mortgage from day 1 using 3 renters instead of 2.

Side Note: This is also about the point in time where I joined Bigger Pockets! I began working with Matt McKay, who is a local RE agent and BP member, to talk RE strategies and facilitate the purchase. My two brothers are also RE investors and serve as great resources for advice and strategizing.

With my salary, qualifying for a second property took some work, but since I had several years of rental income on the books, the first house was now seen as “self-sufficient” from the lender’s perspective, which allowed me to qualify for another owner occupied loan. I made several offers and finally went under contract. Some rehab was required so I re-finished the wood floors and completely gutted and remodeled the two upstairs full bathrooms to make them attractive to prospective tenants. Immediately after closing on the property I began the demo work on the bathrooms that night, with the idea that I could complete the project and have the rooms rented before my first mortgage payment was due. Amazingly enough I had one tenant move in BEFORE the bathroom renovations were complete and the other two moved in within days of project completion.

Converting House #1 to a Stand-Alone Rental

Now it was time to move into house #2. I needed a process to keep the RBTR strategy alive. I offered one of the current tenants whom I trusted the job of property manager. In exchange for a break on the rent, master bedroom, and a garage spot their duty was to manage the property. They are responsible for collecting the rent, finding new renters whenever required, common area cleanliness, and reporting on any required maintenance. After I moved out of the house the extra room was rented within two weeks and the additional CF creates a sustainable income generating property. Success!

General Comments about using RBTR

The RBTR strategy can be great, but it certainly has its’ challenges. It’s not for everyone, but in my case I was young, did not have a lot of cash, and was planning to live with other people anyways so it has been a great way to get into the real estate investing world.

Here are few comments about using this strategy (in no particular order):

• Develop a good tenant screening process
• Discuss rules and expectations before the tenant moves in. It much easier to enforce something that has been previously agreed to.
• Be fair on rent and how to treat your tenants. Quality tenants find quality deals.
• Collect a deposit before the tenant moves in. A deposit does not count as last month’s rent.
• Meet face-to-face and/or skype before the tenant moves in. Texts don’t count as a screening.
• Do not settle for an awkward situation just to get the room filled – it only gets worse
• Try to find tenants with opposite schedules so not everyone is home at the same time
• Try to find tenants with similarities. Sometimes your tenants become great friends!
• My rates for RBTR range from $625 - $750 per month
• If someone needs to move out due to life circumstances, be fair and work with them.
• You can rent your extra garage spaces
• I’ve found all of my tenant on craigslist
• Have a good lease agreement
• Use a background check tool
• Learn to let the little things go

Some balk, but if they have a problem kicking out $35, how will they handle the rent?

I charge $50, it costs me $20 per tenant, if they pass, I credit their first months rent, if they fail (and did not lie to me) I give them their money back.

So I only keep the $50 from the people who 1) make me go through the process and do not take the apartment 2) try to trick me into getting the apartment.

I sleep well at night, and the smart tenants see this as fair.

 That's great functionality, and having just checked out their demo reports I see that I'd also get employment and rental history verification thrown in for that price too. If they actually verified salary that would probably sway me. Definitely going to bookmark them.

Since my earlier posts, Cozy reached out and answered some questions I had. I feel reassured that they're a good option and I'm going to refer my applicants to them initially and see how it goes. I'll report back.

Thanks again to everyone for their responses in this thread, including the reps from Cozy and SmartMove.

Wow @Justin Spaulding, how is Zumper only $20? Does it miss out on anything? I see the credit check with Experian, but how about evictions/criminal/background/etc?

Also, to the broader thread group, might there be any way where maybe you can do the application fee as a credit towards the security deposit if they get admitted? Maybe that can make it easier for people to be okay with the fee? By this I mean that they would have to come up with $35 less (if that's the fee) for their security deposit, for example...Thoughts?

Good to know. It's important to have a good response time.

That said, I tried to speak to someone at SmartMove and got the impression their support is outsourced and script-driven. My question was very generic, but nobody would help me unless I was prepared to give them all my information.

My gut now says go with SmartMove, and maybe try something else next time if it doesn't pan out.

I'm curious though: most print applications I've seen have a section where the applicant authorizes me to contact employer and/or previous landlords to verify information, for example:

SmartMove's FAQ specifically states they don't verify employment/rental history. Do they collect it, and does the form give me authorization to verify it?